Why Credit Card Companies are so Mean

[alfred russel]

I would be in favor of a piece of paper that must be signed with every life insurance sale stating something along the lines of: "The primary purpose of life insurance is to replace income that was lost due to death. Life insurance can protect dependents and others relying your income in the event that you die.

However, life insurance policies should rarely be taken out on children, or adults without dependents. In these cases, life insurance can drain your financial resources without providing significant financial protection against loss for your family."

Would it really be so hard to do this? It isn't as though we would need a new regulatory agency--not only do we have many insurance agencies as it stands, this would just be a few sentences that need to be signed before a policy can become active.

And btw, the investment components of life insurance policies are notoriously awful. I see no reason a young person without financial obligations should ever purchase life insurance (at least in excess of funeral costs).

that's stupid.  Parents could be in serious financial trouble if they don't have a small insurance to pay for the costs of the funerals.  Funerals don't come cheap.  They don't drain resources, they offer you a choice: pay now by small increments, or pay later in one big sum.  Most people can't put their money aside for such important things.

The last sentence of my post that you quoted discusses funeral costs--but if the family has money to put aside for life insurance on a child, it has money to put aside for funerals as well. But while this may sound crass, children are a major financial drain, and the loss of a financial drain is not a risk that needs to be protected against, even if there is an upfront cost associated.

[crazy canuck]

Not a fair characterization: a disclosure takes away choice from no one.

The issue is not that in certain circumstances life insurance can't produce financial windfalls: as you said, the returns were linked to interest rates, which turned out to fall. If you bet on red in roulette and it comes up red for you, that is a great incident, but roulette is still a terrible investment. A better point of comparison would be whether you can earn better returns on similar investments outside of a life insurance policy, and in most cases you can. My guess is that when your partner entered the policy, he did not necessarily want an investment product speculating on interest rate declines.

There are certain tax and compensation circumstances that can make life insurance attractive: but those are complex enough that anyone knowledgeable of them will not be deterred by a few sentences from a regulator.

Actually he purchased the product specifically has an investment vehicle.  He didnt need the money if his kids died .

Also, the wording you suggested initially would rule out Life Insurance investment vehicles because people are not smart enough to know better.  But then you take the elitist view that in fact there are a small few who might understand well enough to actually recognize that what the regulator says is not entirely accurate.

That is highly problematic.  Is it ethical for the government to be regulating in a way that is misleading in the hopes that some people will be smart enough to disregard the warnings if the warnings are not accurate in their particular circumstances?

[DGuller]

The issue is not that in certain circumstances life insurance can't produce financial windfalls: as you said, the returns were linked to interest rates, which turned out to fall. If you bet on red in roulette and it comes up red for you, that is a great incident, but roulette is still a terrible investment. A better point of comparison would be whether you can earn better returns on similar investments outside of a life insurance policy, and in most cases you can. My guess is that when your partner entered the policy, he did not necessarily want an investment product speculating on interest rate declines.

I was about to say the same thing.  In poker, that kind of thinking is called results-oriented (it's actually meant to be derisive, believe it or not).  That's when you attribute good luck to good decision.  In investment world, I guess the analogy would be "Fooled by Randomness".

[crazy canuck]

The last sentence of my post that you quoted discusses funeral costs--but if the family has money to put aside for life insurance on a child, it has money to put aside for funerals as well. But while this may sound crass, children are a major financial drain, and the loss of a financial drain is not a risk that needs to be protected against, even if there is an upfront cost associated.

I agree, but you see that not everyone shares our view.  Should we really take that choice away from them.  Is our view so much more superior to theirs?

[The Minsky Moment]

Actually, I would conclude the opposite - banks have been loaning people money for houses for a long time before we had this housing crisis, so I think the conclusion that there is some fundamental problem that must be addressed via more legislation is not really supported. It's not like there was a dearth of rules about loaning money for houses. They just weren't the right rules, and had the wrong motivation behind them.

Rather, I think the lesson should be that the government should stay out of the money lending business, and decisions about who to loan money to should not be based on political considerations, and government directed lending institutions directed or allowed to  respond accordingly - even if that means that poor people who vote Democrat may not be able to buy a McMansion.

Not sure what legislation you are referring to.  If the claim is that CRA or Fair Lending laws were a significant contributor to the mortgage crisis, that isn't correct.  If what you are referring to was the effective subsidization of moderate income mortgages via Fannie and Freddie, I would agree that was a very big factor.  But it was a big factor because the way in which that effective subsidy interacted with the very powerful profit motive of private enterprise when literally trillions of dollars of business was up for grabs.  That led to a number of dysfunctional market outcomes and behaviors including: (1) a big jump in outright fraud in the mortgage underwriting business, (2) a big rise in the presence of arguably legal but somewhat shady operators using high pressure sales tactics to push mortgage products on which they could earn lucrative fees, and (3) a near total loss of disciplined risk assessment at the wholesale level where mortgages were packaged and traded - a loss which caused a highly distortive feedback effect back into the origination market.

Seems to me one can argue that one solution is to either reform or get rid of Fannie and Freddie (and the interest deduction while we are at it).  Another solution is to identify institutional weakness in the market mechanisms underlying the private mortgage market.  Another is to crack down hard on fraud and do a better job of preventing it from occurring. 

But the best is to do all three.

[DGuller]

Seems to me one can argue that one solution is to either reform or get rid of Fannie and Freddie (and the interest deduction while we are at it).  Another solution is to identify institutional weakness in the market mechanisms underlying the private mortgage market.  Another is to crack down hard on fraud and do a better job of preventing it from occurring. 

But the best is to do all three.

Amen.

[Malthus]

The problem arises when the terms are complex. It may well be the case that the terms are not difficult to understand due to a deliberate attempt to confuse and deceive, but simply because the subject matter is one which is reasonably complex.

that argument could be madfor just about anything, you know, including lawyers...  It seems many people don't clearly understand what their lawyer is gonna charge them and end up with huge bills.  Got caught once like that; 20 000$ for the lawyer and still had to pay 40 000$ for a problem that was clearly the fault of the client (analogy: a restaurant telling a client that his coffee his hot, then proceeds to voluntarily spill the coffee on him and sues the restaurant for serving coffee too hot and the restaurant has to pay through a settlement).

I could make the same arguments about computers where many people feel the salesman is delibaretely trying to confuse them with ambiguous terms such as "megahertz", "megabits", "megabytes", "modem", "refreshment rate", "OEM OS", etc, etc,.

I understand all about that, some people may not.  I understand everything about finance, some may not. 
I have no idea where my liver is.  Before having problems with one of them, I never knew how to exactly place my kidneys. 

I'm supposed to buy some kind of strap for my car and it's supposedly easy to change.  Truth is, I'm gonna have it done by a mechanic 'cause I don't know shit about cars.  He's gonna charge me maybe 50$ for something that takes 15 min.
Some people would say it's fraud.  The mean garage guy did not explain me in details how to do the job myself and did not give me the exact part# I need.  Should we require by law that all doctors teach their patient about biology?  That all mechanics teach you how to repair your car?  Are they dishonest because they do stuff you could maybe do yourself but are scared too?  I never had a computer tech come into my house, I always repair my stuff.  Some people have paid me 40-60$ to repair simple problems.  Computer stores charge 80$ to wipe your hard drive and reinstall Windows.  Are they evil like the insurance companies, the lawyers, the credit card companies, etc?  Should lawyer have to write in advance how much they will charge their client for each case they take and put that in writing on a contract that takes less than a 8.5x11 page?


How far do we need to go to regulate industry practice because not everyone knows everything?

Combining a requirement for full disclosure with caveat emptor ("buyer beware") in effect means that the average person is required to be an expert in these matters, and if they get shafted after reciving all of their mandatory disclosure (but, not being experts, did not understand it), it is their own damn fault.

This position has advantages - it allows for innovation etc. - but it also has disadvantages.

BTW, many of my particular clients insist on up-front budgets for my work.

[alfred russel]

Not a fair characterization: a disclosure takes away choice from no one.

The issue is not that in certain circumstances life insurance can't produce financial windfalls: as you said, the returns were linked to interest rates, which turned out to fall. If you bet on red in roulette and it comes up red for you, that is a great incident, but roulette is still a terrible investment. A better point of comparison would be whether you can earn better returns on similar investments outside of a life insurance policy, and in most cases you can. My guess is that when your partner entered the policy, he did not necessarily want an investment product speculating on interest rate declines.

There are certain tax and compensation circumstances that can make life insurance attractive: but those are complex enough that anyone knowledgeable of them will not be deterred by a few sentences from a regulator.

Actually he purchased the product specifically has an investment vehicle.  He didnt need the money if his kids died .

Also, the wording you suggested initially would rule out Life Insurance investment vehicles because people are not smart enough to know better.  But then you take the elitist view that in fact there are a small few who might understand well enough to actually recognize that what the regulator says is not entirely accurate.

That is highly problematic.  Is it ethical for the government to be regulating in a way that is misleading in the hopes that some people will be smart enough to disregard the warnings if the warnings are not accurate in their particular circumstances?

Then add in the words "generally" and "typically" and then any ethical conundrum will be abated.

Your partner is a highly compensated individual who apparently wanted to bet on a decline in interest rates. By locking in interest rates and gaining tax advantages, he was willing to give up expenses higher than most other investments (not only was he stuck with ordinary investment expenses to the insurance company, he also was stuck with actual life insurance he didn't need). In his circumstances, that may have made sense--I can't dismiss it out of hand.

But especially today with all the investment options out there, I'd challenge anyone to find a life insurance product that offers terms to an investor that I could not reproduce at less cost outside of a life insurance product.

[alfred russel]

The last sentence of my post that you quoted discusses funeral costs--but if the family has money to put aside for life insurance on a child, it has money to put aside for funerals as well. But while this may sound crass, children are a major financial drain, and the loss of a financial drain is not a risk that needs to be protected against, even if there is an upfront cost associated.

I agree, but you see that not everyone shares our view.  Should we really take that choice away from them.  Is our view so much more superior to theirs?

Again, a completely unfair characterization. I'm not in favor of taking choice away from anyone.

[crazy canuck]

The problem arises when the terms are complex. It may well be the case that the terms are not difficult to understand due to a deliberate attempt to confuse and deceive, but simply because the subject matter is one which is reasonably complex. In that case, cavaet emptor may not be sufficient - again, more disclosure obligations may make the situation worse and not better when the disclosure adds details that the average person does not understand, or is more material than they can be expected to absorb.

That is a consideration that competes with the other general consideration, that state-nannyism is basically a bad idea, and outcomes are more efficient if only people are allowed to do what they want, freeing human ingenuity - that didn't work so well in other lending situations such as mortgages.

I agree.  I am not sure what can be done about transactions that by their very nature have the potential to be complex and difficult to understand.  One possible solution is to create higher standards of duty perhaps akin to the broker requirements to know their client.  But then that of course would likely take away access to credit cards from the very people this legislation is aimed at helping.

[crazy canuck]

The last sentence of my post that you quoted discusses funeral costs--but if the family has money to put aside for life insurance on a child, it has money to put aside for funerals as well. But while this may sound crass, children are a major financial drain, and the loss of a financial drain is not a risk that needs to be protected against, even if there is an upfront cost associated.

I agree, but you see that not everyone shares our view.  Should we really take that choice away from them.  Is our view so much more superior to theirs?

Again, a completely unfair characterization. I'm not in favor of taking choice away from anyone.

You keep saying that but you are being a bit misleading in your protestations.  You want a regulator to circulate information that says that people should not buy it for reasons that are in fact incorrect in some cases.

[crazy canuck]

Then add in the words "generally" and "typically" and then any ethical conundrum will be abated.

The problem is that when people read the word "generally" they will always think it applies to them.  Why would they think otherwise.  You assume people are too stupid to know what life insurance is.  Why do you now assumpe people are smart enough to know the government is actually meaning to say the warning is overbroad and can in fact be competely wrong.

[alfred russel]

The last sentence of my post that you quoted discusses funeral costs--but if the family has money to put aside for life insurance on a child, it has money to put aside for funerals as well. But while this may sound crass, children are a major financial drain, and the loss of a financial drain is not a risk that needs to be protected against, even if there is an upfront cost associated.

I agree, but you see that not everyone shares our view.  Should we really take that choice away from them.  Is our view so much more superior to theirs?

Again, a completely unfair characterization. I'm not in favor of taking choice away from anyone.

You keep saying that but you are being a bit misleading in your protestations.  You want a regulator to circulate information that says that people should not buy it for reasons that are in fact incorrect in some cases.

Which does not take away choice from anyone.

What part of the below, which is what I originally posted, is incorrect?

"The primary purpose of life insurance is to replace income that was lost due to death. Life insurance can protect dependents and others relying your income in the event that you die.

However, life insurance policies should rarely be taken out on children, or adults without dependents. In these cases, life insurance can drain your financial resources without providing significant financial protection against loss for your family."

[alfred russel]

Then add in the words "generally" and "typically" and then any ethical conundrum will be abated.

The problem is that when people read the word "generally" they will always think it applies to them.  Why would they think otherwise.  You assume people are too stupid to know what life insurance is.  Why do you now assumpe people are smart enough to know the government is actually meaning to say the warning is overbroad and can in fact be competely wrong.

Actually, you don't even need to add those words--based on what you wrote I figured I had left the modifiers off, but when I went back and read it, they were there to begin with.

I am incredulous that there are a rash of single people that are buying complex life insurance policies that shield their income from taxation (after they have maxed out there other retirement accounts) that would then be dissuaded from doing so because a disclosure form says it is "generally" a bad idea. If they are sophisticated enough that they are seeking out the investment alternative, they understand they aren't the "general" case.

What is much more likely--and in fact more common--is a bunch of single people that vaguely know responsible people should have life insurance buy policies even though they don't have any dependents.

[crazy canuck]

Which does not take away choice from anyone.

What part of the below, which is what I originally posted, is incorrect?

"The primary purpose of life insurance is to replace income that was lost due to death. Life insurance can protect dependents and others relying your income in the event that you die.

However, life insurance policies should rarely be taken out on children, or adults without dependents. In these cases, life insurance can drain your financial resources without providing significant financial protection against loss for your family."

The last paragraph is misleading at best.  For all the reasons we discussed the government should not be in the business of dissuading people from purchasing products which might actually be beneficial to them.  The only reason you see no problem is that you have concluded that other insurance products are a bad investment and you feel so confident in your belief that you would have the government actively perpetuate that view.